Last Monday, December 3, the First Circuit heard an oral argument that I have been looking forward to for ages. The case involves an infamously aggressive hedge fund making an audacious challenge to the constitutionality of the Puerto Rican Control Board—an argument that is framed (hilariously, I think) as rescuing the Puerto Rican people from tyranny. The events that followed did not disappoint in terms of drama.

Though complex to answer, question in the case is easily put: Did the process by which the Puerto Rican Control Board was put in place violate the Appointments Clause of the US constitution?

The lawyering was superb, which was not surprising, given that two legendary former SGs, Ted Olson and Don Verrilli, were at the lectern. But the First Circuit judges were ready and raring to go, and it barely took a minute before they launched into tough questions. Judge Juan Torruella was especially on target; he knows the intricacies of the history and case law relating to Puerto Rico’s status better than almost anyone else and it was a treat to listen to his exchanges with the superstar lawyers. (There were other lawyers making arguments as well, but the First Circuit panel was primarily interested in the Olson-Verrilli positions.)The audio file is available here, and is well worth a listen.

Venezuela began defaulting on its bonds about fifteen months ago and is now in default on almost all of its outstanding bonds (except one that is backed by collateral). The creditors, for these many months, have shown remarkable forbearance in refraining from accelerating the bonds and seeking judgments.

The restraint on the part of the creditors for these past many months, I suspect, was not out of any especially benevolent feelings the creditors have towards the Venezuelan government. Part of the explanation has to do with the different interest rates that applies to unpaid claims if one has an ordinary unpaid claim versus one that has been converted into a judgment (the latter is significantly lower). On the flip side, the legal protections that apply to a judgment are much stronger (no need to worry about CACs or Exit Consents, and one can grab assets before anyone who has refrained from judgement). Plus, the reality of most sovereign debt restructurings is that unpaid claims on interest usually don’t get paid out to anyone anyway (since the sovereign can’t even pay the base claims). For those who want to know more about this, Mark and I talked about these matters here and here, when we were teaching our class on the Venezuelan sovereign debt some months ago.

Once one set of creditors accelerates though, then that puts everyone else who has not done so at a disadvantage because these first guys have an advantage in the litigation/attachment game. And before today, only a few arbitration claim holders and one Promissory Note had begun the litigation game. This had been causing anxiety among the bondholders I’ve been chatting with, but they had not made the move to coordinate into blocks of sufficient size to demand acceleration (most of the bonds have a requirement for acceleration of 25% of the holders in principal amount).

Today’s news from Reuters is big though. A group of hedge funds has put together the necessary number of bonds in the Venezuelan bond due 2034. This is a rather special bond, if memory serves, because an attempt by the sovereign to force a restructuring can be blocked by 15% of the holders (in principal amount) rather than the typical requirement of 25%. Bottom line: this bond is more litigation friendly.

For those of you, who like me have been following the Puerto Rican debt drama, this wonderful new book by Sam Erman of USC might be of interest. There are many wonderful and insightful stories in this book that I was altogether unaware of, despite having spent a lot of time reading about Puerto Rico's bizarre constitutional status. Ultimately though, the most intriguing and insightful aspect of the book, to me, was the connection that Sam draws between the strange "foreign in a domestic sense" status of Puerto Rico and the events surrounding Reconstruction from the same period of time.

Sam was supposed to come to Duke last year to present this to the seminar that I run on Race, Law & Politics with Guy Charles, but we got hit by a snow storm on the day of his talk. My initial thought had been to cancel the discussion and move on to the next paper. But the students in the seminar (and Guy) had liked the draft of the book so much that they asked whether we might have a session to discuss it despite the fact that Sam was not going to be able to make it to Durham any longer. We ended up having a fun discussion with my two wonderful con law colleagues, Walter Dellinger and Joseph Blocher. Indeed, that was perhaps our best session of the term (notwithstanding my general distaste for con law discussions).

Next week, I hope to -- after talking to Walter and Joseph more -- do a little post on the recent oral argument in the first circuit about the constitutionality of the Puerto Rican Control Board. That case, if it comes out the way I think it might, could turn the apple cart upside down. But I need to listen to that oral argument tape again.

Here is the official book blurb for Sam's book:

"Almost Citizens lays out the tragic story of how the United States denied Puerto Ricans full citizenship following annexation of the island in 1898. As America became an overseas empire, a handful of remarkable Puerto Ricans debated with U.S. legislators, presidents, judges, and others over who was a citizen and what citizenship meant. This struggle caused a fundamental shift in constitutional jurisprudence: away from the post-Civil War regime of citizenship, rights, and statehood and toward doctrines that accommodated racist imperial governance. Erman’s gripping account shows how, in the wake of the Spanish–American War, administrators, lawmakers, and presidents, together with judges, deployed creativity and ambiguity to transform constitutional law and interpretation over a quarter century of debate and litigation. The result is a history in which the United States and Latin America, Reconstruction and empire, and law and bureaucracy intertwine."

Over the past few days, I've been struggling with trying to understand a new NY case involving secured debt. The fact that I had to struggle to understand the transaction made me feel insecure enough (on occasion, I purport to teach corporate debt), but then when I tried to delve deeper into the case by looking at the underlying contracts (the "Collateral Pledge" Agreement - yuck), I got even more confused and insecure because I found the darn thing utterly incomprehensible. Indeed, a whole half of that document seemed like it had been drafted for an entirely different type of transaction and the crucial provision that I was looking for didn't even seem to be there. But since I couldn't understand it, I couldn't be sure. Maybe that provision was buried in some other provision that I couldn't figure out . . .

Then, while wallowing in insecurity, I came across this from a recent bankruptcy case out of the Third Circuit (thank you. Third Circuit blog for making me feel better):

The Third Circuit affirmed a ruling leaving in place a tenant’s favorable lease terms after the landlord declared bankruptcy and was purchased free and clear. Best line: “The Lease is long and neither simple nor direct. Indeed, it is an almost impenetrable web of formulas, defined terms, and cross-references–a ‘bloated morass,’ in the words of the Bankruptcy Court.”

I'm turning now to reading the briefs for the Aurelius v. Puerto Rican Control Board/Commonwealth of Puerto Rico case (oral argument on Monday). As compared to that Collateral Pledge Agreement, these briefs read like a beautiful novel. The briefs on both sides are beautifully written, in clear, short and comprehensible sentences. Maybe litigators should be the ones drafting contracts?

The 1MDB case has been on the front pages of the financial papers on a number of occasions recently. The reason: The US justice system is investigating the scam and senior executives from everyone’s favorite ethical investment back, Goldman Sachs, including Lloyd Blankfein, have been caught up in it. And this leads me to my recommendation for holiday reading, if you like reading financial fraud books. The book is The Billion Dollar Whale, by Bradley Hope and Tom Wright of the WSJ. At first, I thought that the book was about the London Whale, but it turns out to be about the rise and fall of a Wharton educated Malaysian named Jho Low – a fascinating character who appears to have engineered one of the biggest financial frauds of the century, while also throwing the most ostentatious parties ever. If you want more background, there is a fun discussion of the book on my favorite financial podcast, Slate Money (Emily Peck, Anna Szymanski and Felix Salmon are a brilliant, and often hilarious, combination). Indeed, I picked up the book after listening to their podcast on it. There is also a short, but on the money, review in the New Yorker by Sheelah Kolhatkar. Among the many colorful characters involved in the version of the story told in The Billion Dollar Whale are Gary Cohn (of Goldman and the Trump’s economic advisory team), Leo DiCaprio, and the Wolf of Wall Street (both the movie and the main character, Jordan Belfort).

David Jones, Chief US Bankruptcy Judge of the Southern District of Texas, has just posted a nifty empirical study of the effects of savings plans on the success of Chapter 13 filings. And, yes, part of the cool study is figuring out how to measure what counts as success in a bankruptcy filing. The study takes advantage of a natural experiment in the Texas courts and has a bunch of fascinating findings, including about the impact of lawyers and legal culture on the choices that end up being made by the subjects of the bankruptcy proceedings.

Part of the reason I know about this study is that David was doing a graduate degree at Duke (in the judicial masters program) and I got to see the project at its inception stage in the thesis workshop that I run with Jack Knight. All of the credit goes to David though (and his wonderful advisor, John de Figueiredo) -- a fact that will be obvious to my fellow slipsters who know that I don't know squat about Chapter 13. But this is a fun study in terms of the design and findings regardless of whether you love Chapter 13 (okay, I realize that everyone else who reads this blog probably does in fact like or love Chapter 13). It takes a basic fact about the inevitable fluctuations in expenses that almost everyone has to deal with, and tests what happens when these provision is made for these fluctuations ahead of time (versus when it is not). Savings plans do indeed seem to make a difference; but a bunch of other factors also appear to matter - some of them quite surprising. Clearly, as David emphasizes at the end of the paper, there is a lot here that is worthy of further investigation (and maybe legislative change).

The abstract for the draft on ssrn (that is forthcoming in the American Bankruptcy Institute's journal) reads:

This paper examines the effects of debtor savings on the viability of chapter 13 bankruptcy plans. The paper further examines the impact of lawyer culture, debtor participation in the bankruptcy process, and judicial activism in the use of the savings program by chapter 13 debtors. Using a data set of randomly selected chapter 13 bankruptcy cases filed in the Southern District of Texas, the analysis demonstrates that while savings has a direct positive impact on the success of chapter 13 plans, the degree of that success is significantly influenced by the views held by debtors' lawyers, chapter 13 trustees, and judges.

A few days ago, Mark and I put up a post on the possibilities of using Chapter 15 bankruptcy for Venezuela's state-owned company, PDVSA. In response, we received a number of terrific comments, both via email and in the comments section.

One of the particularly interesting points that was made to us (both in email and in one of the comments), that we had not raised was the following:

PDVSA is not just a Venezuelan company; it is the Venezuelan company -- the company responsible for generating 95% of the foreign currency earnings of the entire country. Placing the fate of PDVSA into the hands of a bankruptcy judge poses an existential risk to the economy and to the government as the sole owner of the company unless, of course, the government can control the outcome of the insolvency proceeding. But insolvency proceedings in which the equity owner of the bankrupt enterprise can control the outcome are not proceedings likely to be recognized or enforced by foreign courts.

Catch Veinte Dos?

The foregoing also brings up a slightly different question that Bob Rasmussen asked when he was visiting us last week, which was whether the bankruptcy proceeding could be conducted in a manner such that the 100% equity holder (who would normally have to turn over control to the debt holders in an insolvency) could retain all or almost all of the equity. After all, it does seem clear that Venezuela is not going to accept giving up full control of PDVSA. Bob did have some very interesting thoughts as to how this might be done in a purely domestic context. The question that remained though was whether something similar could be engineered for the foreign state-owned company context that wasn't going to give up any control of the process. But more on this later

Donald Trump came into office promising, among other things, to “drain the swamp” and get rid of all that corruption. One year in, how are things looking in terms of swamp draining?

The following is based on work with my super co author, Stephen Choi, of NYU Law School.

To answer (at least partially) the question posed at the start, we have analyzed data on Securities and Exchange Commission (SEC) enforcement actions under the Foreign Corrupt Practices Act – the primary U.S. statute that gets at, among other things, bribes to influence foreign officials with payments or rewards.

We report data that compares SEC enforcement actions against public companies and subsidiaries of public companies under the FCPA from both the final year of the Obama administration and the first year of the Trump administration. We focus on public companies and subsidiaries of public companies because these are the larger economic actors that affect the economy. The Department of Justice also has authority to bring actions, but there were 0 actions brought by the DOJ against public companies and subsidiaries of public companies during the period we examined (although the DOJ has brought several actions against non-U.S. reporting issuers including a number of prominent foreign companies).

Figure I, we think, speaks for itself. On the graph, actions brought during the Trump months (from January 20, 2017 to January 31, 2018—roughly Trump’s first year) are in red, those during the Obama months (January 1, 2016 to January 19, 2017) are in blue. As compared to SEC enforcement activity under the Obama administration, the SEC under the Trump administration, appears to have taken a pause from FCPA swamp cleaning activities. For those who saw our report on partial year information (up to the end of September 2017) here, some months ago – the story has only become clearer with the passage of more time).

The data is from the Securities Enforcement Empirical Database (SEED),a collaboration between NYU and Cornerstone Research. It tracks SEC FCPA actions from January 1, 2016 to January 31, 2018. SEED defines a public company as a company with stock that trades on the NYSE, NYSE MKT LLC, NASDAQ, or NYSE Arca stock exchanges at the start date of the SEC enforcement action (note that this includes both U.S. incorporated and foreign incorporated companies).

Among the multiple offline comments that I received on our post yesterday was a piece of information updating us on the Lerrick nomination and the drama with the Irish SPV that held Argentine debt (the one where a local children's charity was a trustee). Two sources emailed to say that that the Irish SPV issue may be a thing of the past given that folks have discovered that the US Exim Bank has used the identical structure for virtually every major aircraft financing over the last 25 years (apparently this is publicly available information).

This is not to say that the nomination is now going to sail through. New drama can always show up (daily drama seems to be the defining characteristic of this administration).

Poland has been thumbing its nose at key European Union norms for some time now (refusal to comply with environmental commitments, unwillingness to take refugees, and so on). The most recent and egregious norm violation being the reforms of the judiciary being pushed by the current right-wing ruling party that will (in the view of critics) enable it to stack the judiciary with judges favoring it. These were signed into law by President Duda roughly ten days ago.

The European Commission, the EU’s principal administrative body, viewing these latest actions as inconsistent with basic democratic commitments of all EU nations to rule of law principles (independence of the judiciary and so on), has recommended that Article 7 proceedings be initiated. That could end up stripping Poland of its voting rights in EU matters; something that would be unprecedented in EU history. As a practical matter this is not likely to happen, because the removal of voting rights requires a unanimous vote of the remaining 27 members of the EU, and Hungary (with a government of similar inclinations to the Polish one) is one the members. But in a community that values collegiality and cooperation to a very high degree, this is a big deal (at least to this outsider).

There is a broader question here, that some in the press are already asking, which is whether, at some point soon, Poland’s (and perhaps Hungary’s) refusals to act consistently with EU values can constitute enough of a justification for the rest of the EU to expel them? As I explain below, an argument can be made that no member of the EU can ever be expelled, given that there is no explicit process contemplated in any of the EU treaties for expulsion. But can that really be the case?

Joseph Blocher and I were talking to our tax guru friend and colleague, Rich Schmalbeck, yesterday about the provisions in the new tax bill relating to Puerto Rico and, specifically, how it was that the Puerto Rico could be treated as "foreign" for certain purposes (e.g., taxes on intellectual property). The context being that these taxes will likely cause some employers to move operations from Puerto Rico to the mainland or elsewhere, thereby worsening the economic crisis on the island. The answer, best we can tell, goes back to the horribly racist Insular Cases from the early 1900s that allow for Puerto Rico to be treated as "foreign in a domestic sense" (i.e, not on its way to incorporation into the United States - and therefore not worthy of full constitutional protections) -- something that Joseph and I have been railing about (here).

During that conversation, Rich asked us whether we remembered a tourism jingle that ended with "Puerto Rico -- a vacation . . . that lasts a lifetime . . . " So, of course, Joseph and I went looking for it on YouTube (Rich has a brilliant sense of humor and we knew that we'd laugh if we could find it) . . . we didn't find it (still searching though), but we found a truly hilarious (unofficial, surely) government video touching on many of our favorite topics (debt, colonialism). For my friends who work on Puerto Rican debt -- this will make you laugh as well, I think -- the video is here

Of course, going down that the YouTube path, takes one back to John Oliver's hilarious riff on the second class status of Puerto Rico, here

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